Secular Stagnation Determinants and Consequences

Question: Discuss about the Secular Stagnation for Determinants and Consequences. Answer: Introduction: A bubble is the phenomenon that occurs within the economy because of land boom. The speculation of people along with the demand and exuberance leads to an upward escalation in the price of housing (David 2016). Under this circumstance, the price quoted is greater than the intrinsic value of the house. Abiding by the law of demand, the sudden escalation in price leads to sharp decline in peoples demand while supply remaining constant (Scutt 2016). Hence, bubble is formed in the market. Recently over the past few years, Australia is facing this phenomenon as is shown in the diagram below. Charles Ponzi introduced the notion of Ponzi scheme back in 1920. It is a scheme where huge amount of return is provided on investment at the initial stage. This return is obtained from the investment made by other investors and the chain continues (Jain 2015). In this way, the investors are beguiled and the swindle is spread throughout the nation. The sudden upward escalation in the building approval in Australian housing market is going to result in construction of more houses and apartments. This in turn would increase the supply while the demand remains constant. As a consequence, the price of housing and other real estate markets is going to get reduced sharply, leading to bubble burst within the economy. The diagram below explains the scenario. The initial equilibrium was at the point where the demand curve (D) and the supply curve (S) intersected. The equilibrium price quantity supplied were P * and Q* respectively. As a consequence of increased building approval supply increased and there has been an outward shift of the curve from S* to S1. As a result the price of house fell from P* to P and quantity supplied increased to Q. The process of elimination or reduction of government intervention in the financial sector is known as financial de-regulation. This is usually done to improve the competitive competency of the particular industry. This process has a severe control over the demand and supply of housing (Pickering 2015). As a result of de-regulation, the financial markets gets competitive in nature and as a consequence the interest rate gets lowered. It has been observed in past that due to financial de-regulation there has been an upward escalation in the demand for houses (Scutt 2016). With lowered interest rate, people have to pay less return on a certain sum of money, which in turn makes them better off. Under the competitive nature, free hands work creating a match between the demand and supply. As a result, the consumers are benefitted due to lowered interest rate and the banks are benefitted as more customers take up loans. Thereby, welfare is established in the economy due to de-regulation. Oligopoly is the market structure where there is existence of dominance by few numbers of sellers or firms. Other firms may exist in the market with negligible market power. In case of Australia, the media outlets, retail stores and the banking sector shows oligopoly structure (Taylor and Tyers 2017). Australia has been dominated by 4 major banks namely Commonwealth Bank, Westpac, ANZ and NAB. The ACCC has termed Australias banking sector to be cosy in nature. The 4 major banks has control over the entire banking industry and they manipulate the interest rate while working on the same line of principle (Eyres 2016). Competition in this industry is negligible instead while working with same principle, these banks often comes close to one another in terms of its operation and hence it has received the term cosy oligopoly. References: David, L. (2016). As Australia's housing bubble gets bigger, the Reserve Bank prepares to blame Trump | Lindsay David. [online] the Guardian. Available at: https://www.theguardian.com/australia-news/2016/dec/01/as-australias-housing-bubble-gets-bigger-the-reserve-bank-prepares-to-blame-trump [Accessed 29 Jan. 2017]. Eyres, J. (2016). ACCC warns 'cosy' banks it is concerned about competition. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/banking-and-finance/accc-warns-cosy-banks-it-is-concerned-about-competition-20160322-gnojod.html [Accessed 29 Jan. 2017]. Jain, A., 2015. Easy Money: The greatest Ponzi scheme ever and how it is set to destroy the global financial system.Abhigyan,33(2), pp.79-80. Pickering, C. (2015). An omen for Australian house prices. [online] Theaustralian.com.au. Available at: https://www.theaustralian.com.au/business/business-spectator/an-omen-for-australian-house-prices/news-story/cdee8d0ab8b2148360ee5588fac53004 [Accessed 29 Jan. 2017]. Scutt, D. (2016). In the week we've had a warning on oversupply, Australian apartment approvals just exploded again. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/australian-building-approvals-surged-in-july-to-second-highest-monthly-total-on-record-2016-8 [Accessed 29 Jan. 2017]. Taylor, G. and Tyers, R., 2017. Secular stagnation: Determinants and consequences for Australia.